Thursday, May 22, 2008

Ancillary revenues got almost as much podium time at EyeForTravel’s summit this week as social media.

There’s a shift in how airlines are thinking about this – it’s more important for them to try to squeeze as much revenue out of their core business – ie flying people around – than it is to take a commission on an insurance policy.

Ryanair’s head of sales marketing and commercial revenues, Sinead Finn, told the opening session: ‘If we depended on our partners for profit, we'd be in trouble.’

Menu-based pricing for seats is driving this focus on core product ancillaries. And in three years time Ryanair wants 20% of its revenues to be from ancillaries. Other businesses could call it ‘upselling’ (extra legroom on your seat to Sharm, anyone?) but Ryanair is used to having to defend its business model, despite its constantly lowering fares, excellent punctuality figures and bumper profits.

American Airlines, the world’s largest carrier, calls it “merchandising”. In a side room on day two, its international distribution manager Cory Garner admitted that the world’s biggest airline is currently picking up more bookings through third parties than direct. It appears that merchandising its direct channel more effectively is an increasing priority.

It’s looking at “behavioural economics” for some help here. “Customers are predictably irrational,” Garner said. “How you propose an economic transaction can be more important than what you propose.”

An issue here is that not all third parties have the infrastructure in place to be able to deliver the same merchandising opportunities as a brand dotcom, and the GDSs are a bit behind the curve as well.

(This isn’t an issue for Ryanair because it doesn’t sell seats through intermediaries. easyJet, which does, factors in potential loss of ancillary revenue into its point of sale booking fee for third parties).

Ornagh Hoban from Datalex put the issue in perspective by saying that airlines are still on a learning curve when it comes to maximising ancillary revenues. Hotels however appear to be in a win-win situation. Third parties are a valuable distribution channel, both for volumes and yields. But the big gains can come from the merchandising opportunities - upgrades, breakfast, spa treatments - through the direct channel.